Canada’s FCPA – detection, enforcement and prosecution

November 2011 | TALKINGPOINT | FRAUD & CORRUPTION

financierworldwide.com

FW moderates a discussion looking at anti-corruption and bribery efforts in Canada between Peter Dent at Deloitte, John W. Boscariol at McCarthy Tétrault LLP and David B. Debenham at McMillan LLP.

FW: What are some of the major provisions of Canada’s anti-corruption statute? In what ways is it similar and different to comparative legislation in other key jurisdictions?

Dent: Compared to the US Foreign Corruption Practises Act (FCPA), Canada’s Corruption of Foreign Public Officials Act (CFPOA) has the same general intention of making illegal the practice of inducing foreign public officials to decide in favour of the payer. However, there are several nuances. The CFPOA extends to the laundering of the proceeds from the payment and the possession of proceeds from such a bribe. Thus, a Canadian company found guilty of bribing a foreign government official to obtain a contract could theoretically face the disgorgement of revenue flowing from that contract. In the UK, the Bribery Act makes a company responsible for preventing bribery in the first place. This subtle difference places greater focus on the need for robust internal control frameworks. In fact, a defence to a charge under the UK Bribery Act is being able to demonstrate such controls. The CFPOA does not have a similar focus.

Boscariol: The main provisions of the CFPOA are in large part similar to those of other OECD jurisdictions. Violation of the CFPOA’s anti-bribery prohibition consists of the following principal elements: a direct or indirect giving, offering or agreement to give or offer a loan, reward, advantage or benefit of any kind, to any foreign public official or any person for the benefit of a foreign public official; as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organisation for which the official performs duties or functions; and in order to obtain or retain an advantage in the course of a business. Canadian companies can be liable under the CFPOA, not only for making improper payments but also for making an offer to pay that does not involve an actual payment. Despite general similarities, there are some important differences between the CFPOA and the US FCPA, including the fact that the CFPOA has no civil enforcement mechanisms, nor does it impose any books and records obligations or requirements to implement a system of internal accounting controls.

Debenham: The CFPOA does allow for ‘facilitation payments’ which are made to expedite or secure the performance by a foreign public official of any “act of a routine nature” that is part of the foreign public official’s duties or functions. Examples of such payments include routine governmental actions such as obtaining permits, processing government documents, including visas and work orders, and providing police protection, mail services, phone services, power and water. Paragraph 3(3)(a) also provides that if the payment was lawful in the foreign state or public international organisation for which the foreign public official performs duties or functions, then it is not unlawful under CFPOA. Paragraph 3(3)(b) affords a defence if the loan, reward, advantage or benefit was a reasonable expense, incurred in good faith, made by or on behalf of the foreign public official, and was directly related to the promotion, demonstration or explanation of the person’s products and services or to the execution or performance of a contract between the person and the foreign State for which the official performs duties or functions.

FW: Broadly speaking, how would you describe Canada’s historical legislative response to bribery and corruption, in terms of monitoring, investigation and enforcement activities?

Debenham: The RCMP International Anti-Corruption Units (IACU) focus on detecting, investigating, and preventing international corruption such as bribery, embezzlement, and money laundering. The main goal of this unit is to target public sector corruption, including bribery of national and foreign public officials and related laundering of the proceeds of crime. In April 2008, two IACU Divisions were created in Ottawa (A Division) and Calgary (K Division) as part of the Commercial Crime Branch (CCB). The Ottawa unit covers the eastern part of Canada from Ontario and was specifically established as a mechanism for the enforcement of CFPOA The division has also been active in coordinating awareness and prevention with other government players such as the Department of Foreign Affairs and International Trade and continues to reach out to private enterprises and law enforcement partners within and outside the RCMP in the eastern part of Canada and internationally. As a result, a new era in the monitoring, investigation and enforcement of CFPOA began in 2008, and is coming to fruition this year.

Boscariol: Canada has been roundly criticised for its historical lack of enforcement in this area. In a March 2011 report, the OECD expressed significant concerns with Canada’s enforcement record and identified a number of problematic areas, including the application of insufficient penalties and the requirement at common law that the commission of an offence under the CFPOA requires a ‘real and substantial’ connection to the territory of Canada. In its 24 May 2011 evaluation of anti-corruption enforcement effort, Transparency International ranked Canada dead last among the G7 countries. As a result of new enforcement efforts, we may now be seeing the beginning of change. New enforcement resources, reports of new investigations and raids, and the Niko Resources guilty plea all suggest that Canadian companies must pay close attention to their CFPOA obligations.

Dent: Canada’s history of enforcement can be summed up as lacklustre, with only two CFPOA convictions in the past 12 years. In 2011, there has been one significant conviction and 23 companies are currently under investigation. Two factors might contribute to Canada’s relatively low conviction rate. Firstly, there is no specific provision in Canada’s anti-corruption legislation to convict parties based on records offences, which comprise the majority of US enforcements. In the US, companies are often found guilty of improperly recording a bribe payment rather than for the bribe itself – a more straightforward charge to substantiate. Secondly, the US FCPA legislation also contains an administrative penalty process where a Canadian company would always face a criminal sanction. This can be devastating to an ongoing business and would therefore motivate cover-ups. In the US, companies are encouraged to plead guilty in the hope of negotiating an administrative penalty instead of a criminal sanction.

FW: The Federal Anti-corruption Task Force seems to have ramped up its efforts in recent months. What impact will this have on bribery and corruption among Canadian companies?

Boscariol: In January 2008, Canada established an international anti-corruption unit in the RCMP’s commercial crime unit consisting of two teams, one in Calgary and the other in Ottawa, dedicated to investigating potential contraventions of the CFPOA, as well as bribery of domestic public officials contrary to Canada’s Criminal Code and the laundering of the proceeds of crime inside Canada. I understand that the RCMP now has about 30 ongoing investigations of Canadian companies suspected of CFPOA violations. We are told there is much more to come, so Canadian companies should pay close attention in the coming months.

Debenham: Recent prosecutions and guilty pleas have raised the visibility of CFPOA, and attracted the attention of compliance officers of public corporations. The result has been a compliance audit in most companies with a ‘real and substantial’ connection to Canada. The ultimate result will be a top to bottom internal control process to ensure compliance with the legislation as the CFPOA gains the kind of visibility that the FCPA already has.

Dent: Canadian companies are increasingly awakening to the risk of bribery and corruption. Credit belongs to the RCMP’s dedicated but under-resourced task force, and to the international community for highlighting Canada’s enforcement shortcomings. Despite this progress, Canadian companies need to pick up the pace. While large public companies have robust internal control frameworks, middle-market and smaller companies are doing little. Ironically, a large company can likely withstand a corruption scandal – but a smaller one might well be destroyed by it. Investigating transnational corruption schemes is a complex process requiring a diligent review of financial information, dealing with multiple regulatory and/or law enforcement agencies, interviewing witnesses, and sifting through terabytes of electronic data. It involves at least two countries – more if the company is traded on other exchanges – meaning that one corruption scheme could result in responses to multiple full-fledged investigations.

FW: Do you expect to see an increased use of search warrants and raids on businesses? What steps should companies take if they find themselves subject to these investigative methods?

Dent: Although criminal search warrants involving white-collar crime in Canada are still quite rare, they were used for all three recent public RCMP investigations. In such an event, companies should establish a crisis protocol in which the general counsel’s office is informed immediately. Staff must be told to cooperate, but general counsel should direct the company’s response. Companies should inventory everything seized, and request the opportunity to make copies – a difficult process with mobile electronic devices. If a copy cannot be reasonably made, or is not permitted, an accurate inventory is even more important. This information is vital for the company to conduct their own internal investigation, since they are likely to be ‘in the dark’ with respect to the nature of the warrant, and must close this knowledge gap as quickly as possible. Even if law enforcement is not entirely forthcoming with details, the search warrant itself should contain clues to the allegations.

Debenham: Given increased prosecutions are likely, increased use of search warrants and raids are inevitable. Companies should have a proactive response already in place in relation to any form of criminal prosecution to preserve lawyer-client privilege and to ensure a timely and appropriate response team is in place and fully briefed. That team will now have to be familiar with CFPOA prosecutions. The response to the particular prosecution must be tailor-made to the specific prosecution and the circumstances of the particular case. No advice can be given that would apply to meet the needs of all clients in all circumstances.

Boscariol: Yes, and it’s important to have internal procedures in place to ensure that employees know what to do when the authorities arrive at the door. Frontline personnel should know who must be contacted immediately. Your procedures should identify one or more officers in the organisation responsible for coordinating the company’s response. When the authorities arrive, contact counsel immediately and request that the officer in charge delay the search until counsel arrives. A number of steps should be taken to clarify the scope of the search and ensure that the company’s and employees’ rights and obligations are properly addressed and there is a concise and accurate written record of the search. Ensure that employees are aware that they must not remove, destroy or delete any materials, documents or records. Afterwards, assess the results and impact on the company by reviewing the notes and records made during the search. This includes addressing with your counsel any activity or materials seized that were outside of the scope of the search.

FW: What are the extraterritorial implications of Canada’s anti corruption legislation for multinational Canadian businesses?

Debenham: While the FCPA is an example of traditional ‘long arm’ US legislation, Canada will only try cases with a ‘real and substantial’ link to Canada. This means that a portion of the illegal activities will have to have been committed in Canada or have a real impact on Canadians. While this issue has not been litigated, the involvement of a Canadian company or wholly owned subsidiary of a Canadian company may be sufficient to trigger the application of the CFPOA. Canadian companies may also be held liable for the acts of agents or contractors if the agent or contractor plays an important role in managing the company’s activities, or if an officer of the company knows about the agent or contractor’s conduct and does not take all reasonable measures to stop them. The threat of a prosecution both domestically and abroad by another convention country is a real concern.

Dent: The CFPOA covers the involvement of Canadian entities in public sector bribery schemes, encompassing their actions or those of their subsidiaries in foreign jurisdictions. However, at present the CFPOA does not tightly apply nationality jurisdiction to Canadians engaging in bribe-paying in foreign jurisdictions. According to the Department of Justice “…to be subject to the jurisdiction of Canadian courts, a significant portion of the activities constituting the offence [under the CFPOA] must take place in Canada”. In other words, if a Canadian or a Canadian-owned subsidiary bribes a foreign government official in that country without the direction or involvement of a person or entity resident in Canada, the application of the CFPOA is questionable. In essence, Canada’s foreign anti-corruption legislation has one enormous loophole: there may be situations where it has little or no foreign application. This loophole was to have been closed in 2009, but the proroguing of Canadian parliament intervened; to date it has not been re-introduced.

Boscariol: Jurisdiction under the CFPOA operates on a territorial basis. There must be a real and substantial link between the offence and Canada in order to achieve a successful prosecution under the CFPOA. Canadian courts have stated that in order for an offence to come within their jurisdiction on this basis it is necessary that a significant portion of the activities constituting the offence took place in Canada. Ultimately, in my view, talk of extraterritorial or jurisdictional strengths or weaknesses may be a red herring. Many, if not most, Canadian companies are active exporters or investors around the world and will find themselves subject to a number of aggressive anti-corruption regimes, including the US FCPA and the UK Bribery Act 2010. They will have little choice but to implement significant compliance measures to address these requirements regardless of what their lawyers tell them about the jurisdiction of Canada’s CFPOA.

FW: Could you provide an insight into potential fines and penalties issued by Canadian regulatory authorities? Have there been any recent cases of note?

Dent: There have been two cases in Canada since the CFPOA was enacted in 1999. The first, in 2005, involved an Alberta-based oil and gas services company bribing a US immigration officer at Calgary International airport. The bribes were in excess of the fine levied against the company, which was $25,000. The second matter in July 2011 also involved an oil and gas company, but the fine was dramatically different at $9.5m. It would appear that Canadian authorities will be pressing for much more substantial fines, and these can be quite dramatic: under the CFPOA, where there is no maximum penalty, a convicted company could face a penalty equal to the proceeds of the crime committed, or the revenue earned under the contract. There have been no prosecutions that would provide any insights into how this aspect of the CFPOA would actually be applied.

Boscariol: In addition to the SNC-Lavalin investigation mentioned previously, there are other CFPOA cases of note. In May 2010, charges were brought against Nazir Karigar for allegedly bribing an Indian government official in order to facilitate a multi-million dollar contract for the supply of a security system. The company in that case has not yet been charged and the matter is still before the courts. Blackfire Exploration’s offices in Calgary were recently raided by the RCMP which is investigating allegations that the company paid bribes to local authorities in Chiapas, Mexico in order to control protestors in the community.

Debenham: Companies charged under the CFPOA may also be charged under the Criminal Code of Canada with fraud, secret commissions and conspiracy. Provisions of the Criminal Code also prohibit the laundering or possession of the proceeds of other criminal acts. There is also a risk of sanctions by securities regulators. The maximum penalty for these offences when prosecuted by indictment would be 10 years’ imprisonment for an individual. Corporations would face fines with no set maximum limit. If prosecuted by summary conviction, the offences would have a maximum penalty of a fine of not more than $50,000 or imprisonment for a term not exceeding six months, or both. On 24 June 2011, Niko Resources Ltd., a Calgary-based oil and gas exploration and production company, entered a guilty plea under CFPOA with respect to charges of bribing a public official in Bangladesh. Niko provided the energy minister of Bangladesh with a $190,000 vehicle for personal use as well as with trips to Calgary and New York. These gifts had been made at the time when the Minister was assessing how much compensation was owed to Bangladeshi villagers for water contamination and other environmental concerns caused by explosions at a Niko operation. Niko’s sentence included a $9.5m fine and a three-year probation order that requires the company to implement a detailed compliance program subject to review by an independent auditor.

FW: What advice would you give to companies on achieving compliance in this area? How important is to constantly review and update internal policies and procedures?

Dent: Companies should start by reviewing their internal control framework to assess the focus on corruption risk as opposed to fraud risk – an important distinction, with corruption risk having primarily an external focus and fraud risk an internal focus by the organisation. If there is adequate corruption focus, companies should determine if compliance procedures are current, dynamic and ‘living’ – meaning that they are actively implemented. At a minimum, a high-level risk assessment should focus on three things. First, the applicable laws, customs and cultures of each geographical location. Second, the goods or services provided. Finally, the parties with which the organisation interacts – for instance, agents, public officials, employees, contractors, and subsidiaries. One of the most common pitfalls is insufficient due diligence on business partners and their practices within the local country. Companies may be held responsible not only for their own behaviour, but for the behaviour of each and every business partner.

Debenham: Canadian companies with business activities abroad, particularly those with a culture that unofficially condones, if not promotes, conduct prohibited by CFPOA, would be well advised to review their processes and to implement adequate corporate compliance programs and internal control mechanisms that include regular and comprehensive auditing, as well procedures for the reporting of potential violations; identification of an authoritative officer within the company who is responsible and accountable for anti-bribery compliance; and setting a ‘tone from the top’ culture of zero tolerance with internal whistle-blowing mechanisms to an independent audit committee. Companies must also conduct risk assessment of business projects involving business with other countries, especially where joint ventures involve politically connected locals; and monitor and review relationships with foreign government and business partners to establish and document compliance with anti-bribery legislation; and develop a specific communications strategy as part of the corporate emergency response team’s mandate.

Boscariol: Canadian companies must understand that we are a new era of anti-corruption enforcement, not only here in Canada under the CFPOA, but also outside our borders with the implementation of the UK Bribery Act 2010, the continuing extraterritorial reach of the US FCPA, and new US SEC whistleblower rules that provide a significant financial incentive to report potential violations. In this environment, regularly reviewing and updating internal policies and procedures is critical. Financial, reputational and operation risk exposure has never been higher in this area. We regularly see examples of business deals not getting done, company valuations dropping, and sales being lost because of anti-corruption compliance failure. In addition, expensive shareholder derivative and class action lawsuits often accompany anti-corruption enforcement. Anti-corruption enforcement is leading to ‘bet the company’ litigation. I would encourage Canadian companies who are seeking to achieve compliance in this area to carefully review the probation order agreed to in the Niko Resources guilty plea. It clearly sets out what Canadian authorities expect for a CFPOA compliance program.

Peter Dent is the national leader of Forensic and Dispute Services at Deloitte. He provides global public and private sector clients with anti-corruption management strategies and investigates allegations of global fraud and corruption. Previously with the World Bank’s Department of Institutional Integrity, Mr Dent is an expert witness in the areas of forensic accounting and fraud investigations. He has also acted as an independent court-appointed inspector investigating allegations of financial crimes. He can be contacted on +1 416 601 6692 or by email: pdent@deloitte.ca.

John W. Boscariol is a partner at McCarthy Tétrault LLP and leads their International Trade and Investment Law Group. He advises on compliance, disputes and enforcement in the area of anti-corruption, economic sanctions, export controls, national security and other international trade and investment measures. Mr Boscariol regularly deals with various government agencies and appears before panels, courts, and tribunals hearing disputes involving international trade and investment matters. He was recently selected as the sole recipient of the 2011 International Law Office/Association of Corporate Counsel Client Choice Award –Trade and Customs (Canada). He can be contacted on +1 416 601 7835 or by email: jboscariol@mccarthy.ca.

David B. Debenham is a partner at McMillan LLP. He has been a trial lawyer for over 25 years, and is the vice-president of the Association of Certified Forensic Investigators of Canada. His practice explores all areas of commercial litigation including construction law, environmental litigation, tender bids, fraud and trust claims. As part of his practice Mr Debenham uses his training as an accountant to trace funds and assert personal claims against directors and senior managers of corporate debtors. Mr Debenham has been asked to provide his expertise in numerous publications. He can be contacted on +1 613 232 7171 ext 103 or by email: david.debenham@mcmillan.ca.

THE PANELLISTS

Peter Dent

Deloitte

John W. Boscariol

McCarthy Tétrault LLP

David B. Debenham

McMillan LLP